Weekly ETF Fund Flows: Big Bond Fund Creations

Institutional investors tweaked interest-rate risk exposures in a very conspicuous way in the past week, with two midterm bond funds garnering massive inflows in a sign some observers said demonstrated conviction that the Federal Reserve means what it says when it says official interest rates are likely to remain low for quite some time.

Flows into the two funds—the iShares Barclays 3-7 Year Treasury Bond Fund (IEI) and the ProShares Ultra 7-10 Year Treasury ETF (UST)—collectively made fixed income the fuel behind the $3.51 billion in inflows that helped lift total U.S.-listed ETF assets by nearly 1 percent to $1.486 trillion, according to data compiled by IndexUniverse.

IEI added $1.38 billion, lifting its assets almost 60 percent to $3.68 billion, while UST, a double-exposure fund that rebalances daily, pulled in $822 million, which catapulted its assets under management upward by nearly 7,000 percent, to $833 million.

The Fed announcement this week following its policy meeting that it plans to stay the course when it comes to monetary policy might also have had something to do with demand for IEI and UST, as investors find encouragement to “ride the interest-rate risk,” according to IndexUniverse ETF Analyst Gene Koyfman.

“The idea may be that if Fed policy isn't likely to change, and the very short end of the curve offers absolutely no yield, that the next step is there will be continued pressure on the intermediate part of the curve,” said Koyfman, who specializes in fixed-income ETFs.

Perhaps crucial to index investors who benchmark performance with great care, IEI’s midterm duration is in line with current duration of the U.S. Aggregate Bond Index.

That means there isn’t that much more risk involved at this point with owning IEI than debt on the shorter end of the yield curve, Koyfman adds.

On the flip side, the SPDR Gold Shares (GLD), the world’s biggest bullion fund, continued its rough ride, suffering redemptions of almost $1 billion in the past week.

GLD’s assets tumbled by 19 percent in the month of April, as the linkage between the Fed’s easy-money policies and the purchase of gold seemed to break down. Outflows from the gold fund totaled $6.77 billion last month, and the price of the yellow metal fell 7.6 percent.

The asset hit based on those two variables was enough to make GLD the third-biggest ETF in the world by the end of the month, dropping it from the No. 2 slot where it has been for the past several years.

Disclaimer:All data as of 6 a.m. Eastern time the date the article is published. Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.